TAX TALK-03.07.2017-THE HITAVADA
CA. NARESH JAKHOTIA
Tax treatment of the second house property is not same or similar to that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then they have an option to choose any one of the house (according to their own choice) as self-occupied house.
Income tax without actual income: Second house property
I am 37 years old, working in a PSU for last 14 years. I had taken a home loan in 2006 for buying a flat against my name. Since then I have been making small part payments every year and this year in Feb-2017, I have squared off my loan liability. I come in 20 / 30% tax slab Bracket. In lieu of above, kindly assist in answering the following queries:
- If I buy a second property by taking home loan ( considering I still have 22 odd years of service remaining ), will I get Income tax benefit same as my first home loan?
- If in case one does not get income tax benefit for second home then considering the fact that I come in 20/30% slab and considering the EMI paid for say 20 years, is it a safe bet to buy second property or should one go for normal saving like Mutual funds, PPF etc?
- I read somewhere, for second property, even if my property is not rented but still I have to show rental Income as per Govt. norms while filing ITR?
[J. S. Khurana- firstname.lastname@example.org]
As far as the specific issues raised in the present query, it may be noted that:
- Lot many taxpayers commits the mistakes due to lack of the knowledge about the tax repercussions of the second house property.
- Tax treatment of the second house property is not same or similar to that applicable to first house property. If taxpayers have two or more houses which are used for own residence, then they have an option to choose any one of the house (according to their own choice) as self-occupied house, for which they would like to get an exemption from tax and its annual value will be considered as Nil. The second house (or other houses) shall be deemed to be have to been let out [whether or not actually let out] & would be taxable on the basis of its annual value. In short, if taxpayer owns more than one house property then even if the house properties are not let out,
a) One house property can be treated as self occupied house property and nothing would be taxable from such house property.
b] Other house properties shall be deemed to have been let out and its income shall be taxable on notional basis considering its annual value. Readers may rightly drawn the conclusion that income tax is payable without actual income also.
- Computing Income from House Property:
As mentioned above, Income from house property is taxable not on the basis of actual rental income alone. But, is taxable on the basis of its annual value. Annual Value is the sum for which the property might reasonably be expected to be let out from year to year.
To determine Annual Value of the property, one has to get familiar with four terms i.e., Municipal Value, Fair Rental Value, Standard Rent and Actual Rent. The same is discussed hereunder:
- Municipal Value: For collection of municipal taxes, local authorities make periodic survey of all buildings in their jurisdiction. Such value determined by the municipal authorities in respect of a property, is called as municipal value of the property. Normally municipal authorities charge house tax on property based on various factors like type of residential, floor, facilities available in the premises etc.
- Fair Rental Value: The rent which a similar property in the same or similar locality would have fetched is the fair rental value of the property. This is nothing but notional rent a property can get if it has been let out for a year. e.g. In case of flat, one can assume approx rent of other similar flat which is already let out with some addition or reduction in rent with reference to facilities of both flats.
- Standard Rent: It is the maximum rent which a person can legally recover from his tenant under the Rent Control Act. Standard rent is applicable only in case of properties covered under Rent Control Act.
- Actual Rent: For any let out property, Actual rent received or receivable is important for annual value. Actual rent received or receivable is always subject to agreement entered by owner and tenant or matter of negotiable between them whereby if tenant agree to pay for municipal taxes on behalf of owner then these taxes should be added in actual rent received/receivable to derive annual value. There could be vice versa case, where owner has agreed to pay some obligation of tenant, in that case rent will be reduced by that amount.
With above brief idea of the relevant terminology, it may be noted that for any house property, Gross Annual Value is higher of Actual Rent Received or Expected Rent. Expected Rent is nothing but higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent. From the amount of gross annual value, municipal taxes would be deducted to arrive at the net annual value. There are only two types of deductions which can be claimed from net annual value, as under:
a] First is standard fixed ad-hoc deduction of 30% towards repairs & maintenance. This means 30% of the net annual value can be reduced towards repairs, maintenance etc. The deduction is available even if no amount or lesser amount is incurred by the taxpayer.
b] The second deduction is of interest if the property is purchased/ constructed with borrowed fund, up to a maximum of Rs. 2 Lakh p.a. for self occupied house property. The ceiling of Rs. 2 Lakh is not applicable in case of let out or deemed to have been let out house property till FY 2016-17. (By the FA-2017, a new provision is inserted w.e.f. AY 2018-19 as a result of which only Rs. 2 Lakh of overall loss can be adjusted against other income and balance amount of loss can be carried forward.
- Housing loan of Second house property doesn’t offer the same tax benefit as is offered by first house property.
- One needs to ascertain the tax benefit considering the fact that
a] One house property can be treated as self occupied house property.
b] Deduction/loss up to Rs. 2 Lakh can be claimed against house property income.
On the basis of above calculation, you can decide whether to opt for investment in the second house property for tax benefit or not.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at email@example.com]